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Shell electrification plan expands to Australia with 'good fit' ERM Power deal

Royal Dutch Shell PLC's move into the Australian power market is seen as a "good fit" that will allow the Anglo-Dutch major to advance its plan toward decarbonization and electrification, analysts said Aug. 22.

Subsidiary Shell Energy Australia Pty Ltd said Aug. 22 that it will acquire Australia's ERM Power Limited the second-largest energy retailer by load in Australia selling to commercial and industrial markets, with roughly a quarter market share by customer and load for more than $417 million.

"Shell is already an experienced power operator and trader with operations in the U.S. and most European markets. This transaction is part of an expansion push into other global power markets that present opportunities," Wood Mackenzie research director Nicholas Browne said in an Aug. 22 analyst note.

Shell announced earlier this year that it could become the world's biggest electricity company by 2035, as it intends to invest heavily in new non-oil technologies and renewables in the coming years. Shell will spend $1 billion to $2 billion on new energies starting in 2020, including electricity. The major anticipates raising capital expenditures for electrification to $2 billion to $3 billion per year by 2025, executives said in June.

"Their global electrification and energy solutions ambitions clearly align with our strategy and they have the resources and the reach to accelerate the opportunity," Julieanne Alroe, chair of ERM Power's board, said during an Aug. 22 conference call.

Unlike most Australian utilities, which own and operate coal-fired facilities, ERM Power has a gas-only fleet. The deal will allow Shell to supply gas from its Queensland Curtis LNG project to ERM Power's Oakey Power Station in Queensland.

"Shell does not have dedicated international LNG contracts from this project, providing it with the flexibility to redirect gas to the domestic market," Browne said. "Furthermore, global LNG prices are currently depressed and are expected to remain so for one to two years. The acquisition provides Shell with an opportunity to arbitrage between domestic and international."

Global LNG prices have been bogged down by excess supply from Australian and U.S. projects in the last couple of years.

"Domestic [LNG] prices are relatively attractive currently," Browne said. "The massive scale of the Queensland Curtis resource means that Shell can significantly increase its gas supply to ERM Power in the future, particularly if its pipeline of potential new power projects develop further."

In its quest to branch out and diversify beyond the traditional oil business, since late 2017 Shell has acquired U.K. power supplier First Utility Ltd., European electric vehicle charging enterprise The New Motion BV and a stake in German battery firm sonnen GmbH, which has operations in Australia.